Time to Reevaluate AAPL Holdings Amid Growing Anti-Apple Sentiment in China?

Posted on by The INO.com Team

The swift acceleration of pioneering technologies, coupled with a remarkable upswing in digital growth, has notably amplified the allure of customized hardware solutions. However, not all technology hardware firms are enjoying these benefits.

Tech behemoth Apple, Inc. (AAPL), known for revolutionizing numerous product sectors, encompassing personal computers, smartphones, and tablets – added another milestone by becoming the first company ever to surpass a market cap of $3 trillion.

In March, AAPL’s CEO Tim Cook belonged to the pioneering group of international executives to engage Beijing's high-ranking officials following the relaxation of COVID-19 restrictions. Cook lauded the mutual enrichment of both the company and China, characterizing their relationship as "symbiotic.”

Half a year later, in September, this association was showing signs of tension. AAPL found itself navigating through new competitive challenges within China, which was its major manufacturing base and its most significant international market.

In September, AAPL experienced a stock sell-off that slashed almost $200 billion from its market cap. This followed revelations that multiple government departments had inflicted bans on AAPL product usage within government agencies and state-owned enterprises. The doubts encircling AAPL's future production and sales in China have triggered a considerable decline in its stock value.

AAPL's China problem could be intensifying as the Chinese government purportedly broadens its stringent measures against the iPhone. Governmental agencies and state-backed firms across at least eight provinces in China have recently directed their staff to transition away from foreign electronics and adopt local Chinese brands instead.

This shift has accelerated in the last couple of months, indicating a significant rise from the September situation. If this trend continues, it may negatively impact AAPL's sales in China, which accounted for about 16% of its revenue in the fiscal fourth quarter that ended September 30, 2023. This situation could position AAPL's operations, especially its key product, the iPhone, under close watch in the country.

Fueling a broader initiative by China to reduce dependency on American technology, this intensified effort promotes well-known Chinese brands such as Huawei Technologies Co. Chinese software and hardware products have steadily replaced their American counterparts over the years, including software from Microsoft, computers from Dell, and chips from Intel. However, these new regulations are now likely to affect AAPL's market dominance within China directly.

The effects of the recent ban are reflected in AAPL's financial results for the fiscal fourth quarter that ended on September 30, 2023. The company’s total net sales reached $89.50 billion, indicating a marginal year-on-year decline. Notably, net sales within Greater China for the quarter dipped slightly by 2.5%. Its net income grew 10.8% from the prior-year quarter to $22.96 billion.

For the fiscal year of 2023 ended on September 30, 2023, AAPL witnessed a 2.8% drop in annual revenue, standing at $383.29 billion. This represents a downward trend across the past four quarters, consistently recording a slump in sales. Additionally, the iPhone maker is trailing behind local Chinese competitors Huawei and Xiaomi, posting sales boosts of 66% and 28%, respectively.

A significant factor contributing to AAPL's underwhelming performance is the turbulence experienced in previous quarters. The company suffered from factory disruptions that endured over several periods, with the tacit demand created by these disruptions subsequently met the following quarter, creating an anomalously high baseline effect. Amid the macroeconomic fluctuations of the September 2023 quarter, AAPL also dealt with various foreign exchange challenges.

On the brighter side, apart from cornering the premium tech market, APPL has earned its stake with one of the most substantial capital return frameworks. In fiscal 2023, AAPL repurchased $77.55 billion worth of AAPL shares. Over the past ten years, the stock buyback program has facilitated a record-breaking $604 billion.

Against the average P/E ratio of 24.49x in the tech sector, AAPL stands at 30.03x. The company continually improves its P/E ratio by consistently reducing the number of its outstanding shares.

AAPL's share value has escalated over 11 times over the past ten years, with gross profit increasing by 2.6x since 2013, approximately 1.3x from buybacks, and threefold due to P/E multiple expansion. This growth may not be readily apparent given the already inflated multiple.

Investors can bank on the continuity of buybacks as long as the cash flow remains robust. However, it prompts a crucial question: What will become of the shares in a financially unstable year when the cash flows are disrupted, customer sentiment sours, and the company lacks the $90 billion in buybacks fortifying the share price?

Mixed Outlook

The tech giant issued a warning in November that it did not foresee any growth in annual revenue for the crucial December quarter, which represents the first complete quarter incorporating iPhone 15 sales.

For the first quarter ending December 2023, its revenue and EPS are expected to increase 1% and 11.6% year-over-year to $118.19 billion and $2.10, respectively. For the fiscal year ending September 2024, its revenue and EPS are expected to increase 3.6% and 7% year-over-year to $397.18 billion and $6.56, respectively.

Wall Street analysts expect the stock to reach $202.18 in the upcoming 12 months, indicating a potential upside of 3.8%. The price target ranges from a low of $150 to a high of $250.

Bottom Line

Investors perceive AAPL as a solid financial bastion characterized by impressive cash flow, global demand for its product portfolio, and robust shareholder return schemes despite grappling with decelerating growth and challenges in the Chinese market.

In December, the company reclaimed its $3 trillion market cap, a milestone not seen in roughly four months. Significantly outpacing the general S&P 500 index this year, the company's shares are poised to yield their highest annual returns since 2020.

However, 2023 has presented a series of macroeconomic challenges for AAPL, particularly impacting consumer tech spending patterns. The most significant obstacle was foreign exchange headwinds, which played a considerable role in dampening the firm’s revenue during the fiscal year of 2023 that ended in September.

Nonetheless, it is worth recognizing a potential reversal of fortune. AAPL saw a 4% decrease in its revenues year-over-year for the first half of fiscal 2023; these losses tapered to only a 1% fall in the second half, signaling improving revenue trends moving forward.

The most recent actions by China signify a continuation of a long-standing campaign to eliminate foreign technology in sensitive sectors, in line with China's ambitions to achieve self-reliance in key industries. What remains uncertain is the extent to which China intends to resist the implementation of AAPL's products domestically.

Primarily, AAPL sources most of their iPhones from Chinese factories managed by suppliers such as Foxconn Technology Group, which employs millions of Chinese citizens. However, amid these developments aiming to control iPhone usage, AAPL has gradually shifted its production hub to alternative countries, including India, and may consider reducing its output in China further due to these new constraints.

Additionally, AAPL is expected to launch its groundbreaking Vision Pro virtual reality headset next year – its first significant computing platform since it introduced the Apple Watch in 2014. The impact of this innovation on near-term performance is yet to be determined.

AAPL, traditionally a hardware company, now faces the challenge of innovating within its lineup of smartphones, tablets, and other electronic devices. Despite these challenges, the tech giant is well-positioned to outshine its industry competitors in the upcoming year, owing to the robust performance of its services segment. This division, encompassing Apple Pay, subscription-based offerings, and licensing fees, continues to yield consistent revenue, underscoring the resilience and diversified strength of AAPL's business model.

AAPL's PEG ratio is 3.29x, which by standard measure is deemed to be expensive as any value surpassing 2x is considered high. Further, the Price/Cash Flow ratio is pegged at an elevated 24.76x. These metrics simply reflect an overvaluation of the company's shares.

In conjunction with these inflated valuations, the projected growth rate over the next five years is a mere 6.14%. Such conditions could suggest inevitable losses at some stage. Those considering investment now run the risk of experiencing significant losses.

Therefore, it could be wise to wait for a better entry point in the stock.

DASH in, EBAY out - a Deep Dive Into the 2024 Implications

Posted on by The INO.com Team

Following the conclusion of the Consumer Price Index report and the Federal Reserve meeting, we are approaching the last major “liquidity event” of the year: the annual reconstitution of the Nasdaq 100 Index.

In the latest annual reconstitution of the index, floundering e-commerce giant eBay Inc. (EBAY) has seen its spot given to the thriving food delivery service DoorDash, Inc. (DASH). The respective removal and addition will take effect before the commencement of trading on December 18, 2023.

Inclusion within the Nasdaq-100 Index is significant for stocks as it is a reference point for numerous financial products, encompassing options, futures, and funds. Portfolio managers, maintaining portfolios synced with the index, purchase shares in the same proportion included in the index. The addition of stocks is dictated by market capitalization and trade volume. The removal indicates a shift in favor of other companies that met these criteria more closely.

The annual reconstitution aligns with another significant trading occurrence known as triple witching, a quarterly phenomenon marking the expiration of stock options, index options, and futures.

This period provides an invaluable opportunity for the trading community to transfer substantial stock quantities during the final burst of tax loss harvesting or strategically position themselves for the coming year. There will typically be a 30%-40% decrease in trading volume in the year's last two weeks post-triple witching, with noteworthy volume largely limited to the final trading day.

While all this may seem of mere scholarly curiosity, the recent surge in passive index investing over the past two decades has heightened the importance of these events to investors.

Adjustments to these indexes, whether through additions or deletions, share count alterations, or changes in weightings to lower the dominance of large companies, initiate substantial monetary transfers into and out of mutual funds and ETFs directly or indirectly associated with these indexes.

Invesco QQQ Trust (QQQ) is emblematic of these changes due to its strategic linking with the Nasdaq-100, which lists the 100 largest nonfinancial companies on the Nasdaq. The QQQ fund ranks as the fifth-largest ETF, overseeing approximately $220 billion in managed assets.

Given this backdrop, let’s delve into an in-depth analysis of DASH and EBAY stocks and find out what’s in store for them in 2024.

DoorDash, Inc. (DASH)

DASH, a prominent American food delivery provider, has recently garnered attention for various developments attracting investor interest. A key factor is a surge in the company's share value following an impressive earnings report, largely fueled by its deliberate extension beyond customary restaurant delivery services.

The ongoing favorable momentum has been additionally strengthened by the release that DASH is set to feature on the Nasdaq-100 Index. This indicates the company’s burgeoning prominence and fortifying position within the industry.

In the fiscal third quarter that ended September 30, 2023, the company reported a surge in revenues by 27.2% year-over-year to a whopping $2.16 billion, surpassing the consensus mark.

This considerable growth is attributed to the robust performance across total orders and Marketplace GOV, along with refined logistics efficiency and growing advertising contributions. Total orders increased 23.7% year-over-year to 543 million, while Marketplace GOV increased 23.8% from the year-ago quarter to $16.75 billion.

Looking forward to the fiscal fourth quarter ending December 2023, the company projects its Marketplace GOV to range between $17 billion and $17.4 billion. Meanwhile, the adjusted EBITDA is expected to stand between $320 million and $380 million. It is noteworthy that DASH plans significant, ongoing investments in the future as it seeks to broaden its service offerings.

After these results, DASH shares saw a rise of over 7.5% during after-hours trading, signaling investor confidence. The post-earnings rally of DASH shares bears testament to the company's financial wellness and effective strategies to diversify its revenue sources. Its deliberate shift beyond restaurants to include delivery services for groceries, alcohol, and other items has appealed to its consumer base, attracting investors along the way.

The exceeding market expectations with its earnings report indicates that the company's growth strategies produce measurable outcomes crucial to maintaining long-term investor trust.

For the fiscal fourth quarter ending December 2023, analysts anticipate its revenue to increase 24.1% year-over-year to $2.26 billion, while EPS is expected to come at $0.55.

In a rare and strategically significant decision, the firm transitioned from the NYSE to the Nasdaq in September 2023, signifying its positioning and businesses centered on innovative technology. DASH’s CFO Ravi Inukonda said, “We are delighted to join a community of leading technology companies with our transfer to Nasdaq.”

This momentous shift, further strengthened by the company's recent inclusion in the Nasdaq 100, has the potential to amplify investor trust, possibly driving increased market capitalization in forthcoming years.

The Nasdaq-100 Index, encompassing some of the most prodigious and influential entities within the technology and innovation domains, has recently acknowledged DASH's escalating prominence via its inclusion.

This inclusion is traditionally followed by a surge in the demand for the company's shares, initiated by funds tethered to the Nasdaq-100 that are now obliged to purchase stock in DASH. Historical examples corroborate the potential for such inclusion, triggering an upswing in stock prices.

This development also endorses the recognition of DASH for its stellar scalability, incessant innovation, and adeptness at market adaptation – qualities seen as ideal for corporations represented in the technology-centric benchmark. It simultaneously alludes to a transformation in market dynamics and the arrangement of the tech industry, where DASH’s operating model aligns better with extant and prospective market trajectories.

From the investors’ perspective, such an inclusion might be interpreted as a portent of persistent growth, inciting a reevaluation of their investment portfolios. The acknowledgment from Nasdaq will likely draw a more diversified range of investors, like institutional investors, potentially augmenting liquidity and raising visibility for DASH shares.

However, investors should be aware of the stark competition and the intrinsic risks inherent to the rapidly evolving delivery market, characteristic features of which comprise regulatory hurdles and the compulsory need for uninterrupted innovation.

eBay Inc. (EBAY)

EBAY is grappling with intensified competition from e-commerce contemporaries and macroeconomic hurdles. In the fiscal third quarter that ended September 30, 2023, its profit was $1.03 per share, and sales stood at $2.50 billion, aligning with analyst estimates.

Gross merchandise volume, the value of all goods sold on EBAY, increased 1.6% to $17.99 billion in the quarter, surpassing analysts’ average estimates of $17.72 billion. The company reported 132 million active buyers in the quarter, down 2.2% year-over-year. Its advertising revenue of $366 million fell short of analysts’ estimates.

EBAY's recent sales forecast for the upcoming holiday period has dispirited investors. Revenues for the current quarter are anticipated to be between $2.47 billion and $2.53 billion. Even though the figure seems healthy, it falls below the industry analysts' average projections of $2.60 billion. The company expects EPS between $1 and $1.05 in the quarter ending in December, below the analysts’ $1.05 estimate.

EBAY's gloomy revenue outlook for the traditionally profitable holiday season implies persisting struggles in maintaining customer loyalty against fierce rivalry from larger competitors. Projected U.S. online sales are expected to swell by 4.8% during the holiday period of November 1 to December 31. However, EBAY faces a steep climb in attracting consumers. To confront these obstacles, the organization intends to heighten its cost-efficiency to preserve profit margins and earnings.

The unexpected forecast shocked the financial arena, particularly unnerving EBAY investors. Following the disclosure, EBAY’s shares plummeted significantly, highlighting the extensive expectations investors harbor for the company owing to its dominant e-commerce standing.

For the fiscal fourth quarter ending December 2023, analysts anticipate its revenue to decrease marginally year-over-year to $2.51 billion, while EPS is expected to decline 4.2% year-over-year to $1.02.

Additionally, EBAY's exclusion from the Nasdaq-100 Index indicates its diminishing influence and an uncertain long-term business outlook. The removal might weigh the company's stock price, leading to diminished appeal and demand among investors who actively follow or invest in the index. Concurrently, index funds mirroring the Nasdaq-100 could divest their EBAY shares in favor of newly added stocks, thereby increasing selling pressure on EBAY.

The removal could reflect diminished market confidence in EBAY’s performance and growth trajectory, particularly when benchmarked against its e-commerce competitors.

However, this shift also presents EBAY with a unique opportunity for introspection and strategic reassessment. To secure its industry competitiveness, it becomes imperative for the company to acclimate to evolving market dynamics and align itself with investor anticipations.

Despite these potential impacts, the actual effect of this reconstitution might not be significantly detrimental or enduring, as EBAY’s infrastructural foundations and market positioning do not stand directly compromised by the reordering.

In addition, EBAY could potentially harness certain favorable factors to its advantage. These include an uptick in retail activity during the holiday season, the broadening reach of its managed payment service, and robust growth within its classifieds and advertising segments.

Examining the Road Ahead for Spotify (SPOT) After CFO Departure and Sell-Off

Posted on by The INO.com Team

Spotify Technology S.A. (SPOT) recently announced that its CFO, Paul Vogel, will step down from his position after eight years of service at the music streaming giant. Vogel, who joined Spotify in 2016 as head of investor relations before taking over the CFO role in 2020, will exit on March 31, 2024. This news came just days after the company announced its third round of layoffs for 2023.

“Spotify has embarked on an evolution over the last two years to bring our spending more in line with market expectations while also funding the significant growth opportunities we continue to identify. I’ve talked a lot with Paul about the need to balance these two objectives carefully. Over time, we’ve come to the conclusion that Spotify is entering a new phase and needs a CFO with a different mix of experiences,” SPOT’s CEO Daniel Ek said in a release announcing Vogel’s exit.

In the announcement, Ek reiterated that the company remains on track to deliver against the targets outlined on its Investor Day.

The music streaming company launched an external search for Vogel’s successor. Ben Kung, vice president of financial planning and analysis, will take on expanded responsibilities to support the company’s financial leadership team’s realignment in the interim.

Organizational Changes

Earlier this month, SPOT announced laying off 17% of its workforce, aiming to lower its costs while focusing on its profitability.

In an email sent to employees posted on the company’s blog, Spotify’s CEO said that the job cuts are part of a “strategic reorientation.” The post didn’t specify the exact number of roles affected by the measure, but a spokesperson confirmed that it amounts to nearly 1,500 people.

The company added that it had used cheap financing to expand the business and “invested significantly” in employees, content, and marketing over the years 2020 and 2021. However, Ek indicated that Spotify got caught out as central banks began hiking interest rates last year, leading to slow economic growth. The music streaming service had to “rightsize” its costs for a new economic reality.

“Over the last two years, we’ve put significant emphasis on building Spotify into a truly great and sustainable business – one designed to achieve our goal of being the world’s leading audio company and one that will consistently drive profitability and growth into the future,” Ek said in an internal memo shared on SPOT’s website.

“While we’ve made worthy strides, as I’ve shared many times, we still have work to do. Economic growth has slowed dramatically and capital has become more expensive. Spotify is not an exception to these realities.”

Stockholm-based music streaming giant reported a loss of €462 million ($499.21 million) for the first nine months ended September 2023.

Spotify slashed 6% of its workforce, or about 600 employees, at the beginning of 2023. Then, in June, the company cut staff by another 2%, roughly 200 roles, primarily in its podcast division.  

Shortly after the latest round of layoffs was announced on December 4, SPOT’s stock surged nearly 8%.

Top Execs Continue Stock Sales

As the value of Spotify soared after the announcement of laying off almost a fifth of its workforce to cut costs, one of its top executives cashed in more than $9 million in shares.

On December 5, Paul Vogel, Spotify’s CFO, moved to sell more than $9.4 million worth of stock, according to securities filings. Also, two other senior executives cashed in approximately $1.6 million in shares, the Guardian reported.

Solid Last Reported Financials

SPOT reported a surprise profit for the third quarter that ended September 30, 2023, its first quarterly profit in a year and a half, as the music streaming platform’s price increases and cost-cutting measures began to take effect.

Spotify reported a third-quarter net income of €65 million ($70.24 million), or €0.33 ($0.36) per share, compared to a net loss of €166 million ($179.37 million), or €0.99 ($1.07) per share in the prior year’s period, respectively. It’s a significant beat, given analysts had estimated a loss of $0.21 per share. The company posted a profit, driven by “lower marketing spend and lower personnel costs and related costs.”

The company’s revenue was €3.36 billion ($3.63 billion), up 10.6% year-over-year. This is compared to the consensus estimate of $3.55 billion. Its gross profit grew 18% from the year-ago value to €885 million ($956.29 million). Furthermore, its operating income came in at €32 million ($34.58 million), compared to an operating loss of €228 million ($246.37 million) in the same quarter of 2022.

The Swedish music streaming giant raised the prices of its subscription plans earlier this year, increasing the monthly bill for users from nearly $1 to $2, depending on the plan. In its third-quarter earnings report, SPOT said “the early effects of price increases” were partially responsible for the 11% year-over-year revenue growth.

Spotify had 574 million monthly active users in the third quarter, an increase of 2% and 2 million ahead of its guidance. Also, its subscribers rose 16% year-over-year to 226 million.

Mixed Historical Growth

SPOT’s revenue has grown at a CAGR of 19% over the past three years. The company’s total assets have increased at a CAGR of 9.6% over the same timeframe, while its levered free cash flow has grown at a 138% CAGR. However, its tangible book value has declined at a CAGR of 21.6%.

Mixed Analyst Estimates  

Analysts expect SPOT’s revenue to grow 17.1% year-over-year to $4 billion for the fourth quarter ending December 2023. The company is expected to report a loss per share of $0.04 for the ongoing quarter. Additionally, the company missed the consensus revenue EPS estimates in three of the trailing four quarters, which is disappointing.

For the fiscal year 2023, Street expects SPOT’s revenue to increase 13.1% year-over-year to $14.33 billion. Also, the company’s revenue for fiscal year 2024 is expected to grow 17.3% year-over-year to $16.81 billion. However, its EPS is estimated to remain negative for at least two fiscal years.

Decelerating Profitability

SPOT’s trailing-12-month gross profit margin of 25.69% is 47.7% lower than the industry average of 49.13%. Its trailing-13-month EBITDA margin and net income margin of negative 2.84% and negative 5.74% compare to the respective industry averages of 18.71% and 5.74%.

Further, the stock’s trailing-12-month levered FCF margin of 1.35% is 82.8% lower than the 7.82% industry average. SPOT’s trailing-12-month ROCE, ROTC, and ROTA of negative 33.49%, negative 6.31%, and negative 9.64% are compared unfavorably to the industry averages of 3.41%, 3.38%, and 1.24%, respectively.

Elevated Valuation

In terms of forward EV/Sales, SPOT is currently trading at 2.57x, 44% higher than the industry average of 1.79x. Also, the stock’s forward Price/Sales and Price/Book of 2.71x and 15.53x are significantly higher than the industry averages of 1.14x and 1.82x, respectively.

Also, the stock’s forward Price/Cash Flow multiple of 90.62 is 845.7% higher than the respective industry average of 9.58.

Stock Downgrade

On December 1, Citigroup downgraded SPOT’s stock from “Buy” to “Neutral,” with its analyst Jason Bazinet citing revenue and user retention concerns. With significant changes in the company’s business model, from subscription price increases and an emphasis on developing podcasting content, there is uncertainty about the effectiveness of these strategies.

Bottom Line

SPOT’s fiscal 2023 third-quarter earnings beat analyst expectations on the top and bottom lines. Despite posting a surprise profit in the last reported quarter, the company recently announced the third round of layoffs for 2023.

Just days after mass layoffs, Spotify announced that its CFO Paul Vogel will step down after eight years of service at the company. Following a share price surge set in motion by an announcement of job cuts, top SPOT exes, including Vogel, continue to sell shares.

The recent layoffs and other cost-cutting measures align with the company’s broader strategy for financial sustainability. While several organizational changes at SPOT may prove fruitful in the long run, the company’s near-term prospects appear uncertain. Street expects the company to report losses for at least two fiscal years.

Even analysts at Citi raised questions about the effectiveness of the strategies, including major changes in SPOT’s business model, from subscription price increases to an increased focus on developing podcasting content.

Given its lower-than-industry profitability, stretched valuation, and uncertain near-term outlook, it could be wise to wait for a better entry point in this stock.

STLA vs. California - Assessing the Investment Landscape Amid Emissions Policy Disputes

Posted on by The INO.com Team

Stellantis N.V. (STLA), one of the globe's leading automakers, was formed in 2021 from the merger between Fiat Chrysler Automobiles and the PSA Group. The company's portfolio includes illustrious brands like Ram, Chrysler, Dodge, Fiat, and Jeep, and it has a strong presence in North America and Europe.

STLA has disclosed plans for significant workforce downsizing at its Jeep manufacturing plants in Detroit and Toledo, Ohio. The company has attributed its dire decision to the stringent emissions regulations enforced by California.

STLA’s Detroit plant, known for manufacturing the Jeep Grand Cherokee, may witness a potential impact on around 2,455 employees and roughly 1,225 workers at the Toledo facility – which is responsible for producing the Jeep Wrangler and Gladiator models – are also expected to bear the brunt of the downsizing decision.

To respond to the sluggish sales performance of its Jeep brand, STLA has made strategic moves to adjust production levels accordingly. These include transitioning from an alternative work regimen to a customary two-shift operation at its Toledo location and eliminating one out of three shifts at the Detroit facility, which currently employs 4,600 individuals. The intended job reductions are projected to take effect as soon as February 5.

Let’s understand the issue in detail...

Since this summer, STLA has substantially curtailed its shipments of internal combustion engine (ICE) vehicles and EVs to dealers in the 14 states that adhere to the stringent rules set forth by the California Air Resources Board (CARB).

Consequently, consumers shopping in these jurisdictions are typically presented with a stock of plug-in hybrid SUVs. However, an order must be placed for those interested in buying an all-electric version or an ICE model.

Quite contrarily, dealers trading in states operating beyond CARB standards face a disproportionately different situation with scarce or no hybrids in stock, essentially providing an ICE-only product lineup. The underpinning rationale for STLA's strategic supply management is to meet CARB's emission standards in those 14 states, enabling manufacturers to sell a fixed percentage of zero-emission vehicles and plug-in hybrids.

But here’s the challenge for the Jeep producer. In 2020, STLA rivals Ford, Honda, Volkswagen, and BMW entered an exclusive agreement with California, delineating unique compliance criteria considering nationwide sales rather than solely focusing on CARB's jurisdictions. STLA argues that such a modification disrupts industry balance by unfairly tilting it in favor of the brands due to the more achievable nature of these revised targets.

After the initial agreement, Volvo and Geely acceded to the pact with California, leaving STLA in an unfavorable position as their request to participate was rejected. Seeking an explanation, STLA alleges that the rebuff resulted from Chrysler's public protestation against California's assertive act of promulgating autonomous rules in 2019. This drew attention, provoking similar challenges led by other automobile manufacturers such as General Motors (GM) and Toyota.

GM was prominently outspoken among those opposing California's regulatory authority, culminating in a stern confrontation. As a reaction, California declared it would cease purchasing vehicles from GM for its fleet requirements. The discord was resolved in January 2022 when GM consented to adhere to California's stringent emission standards.

Recent developments include STLA formally challenging the stand by submitting a petition to California's Office of Administrative Law, indicating accusations against the state for clandestine regulatory maneuvering involving selective automakers in direct violation of the California Administrative Procedure Act and claiming it amounts to a “double standard.”

The requested reevaluation of the framework agreement represents a bid to prompt the state’s Office of Administrative Law to invalidate the contract. While this outcome is improbable, it serves to reestablish an equal playing field with those car manufacturers who previously expressed a more favorable stance toward reinforcing emissions regulations.

Probable Impacts on STLA

STLA has actively opposed President Biden's endeavors to curtail carbon emissions and promote EVs. They allege that the stringent regulations risk imposing multi-billion-dollar penalties on their operations.

The automobile manufacturer has voiced support for lowering emissions, citing it as a challenge to California to address its "competitive disadvantages" and ensure fair product distribution across all states.

Earlier this year, STLA revealed plans to cease the supply of non-hybrid vehicles in states adhering to California's stringent emissions regulations in compliance with these rigorous environmental standards.

The discontinuation of gas-only vehicle shipments to 14 states, in the absence of specific customer orders, may lead to substantial repercussions for STLA. The automaker's sales and market share could decline significantly, while costs might escalate, eroding profit margins.

Moreover, the recently filed petition by STLA, charging CARB with executing an “underground regulatory scheme” against the company, casts a shadow of potential legal disputes. Fines, penalties or sanctions from CARB or other administrative bodies could emanate from the proceedings.

Furthermore, it is expected that STLA will revise its vehicle distribution strategy, adjusting it based on CARB emission compliance per state. This shift may result in restricted gas-only model availability for dealers in non-CARB states. Consequently, such constraints could initiate ripple effects on customer satisfaction, loyalty, and retention, potentially impacting dealer profitability and operational efficiency.

Diminishing SUV production, a recent move by STLA, might endanger the company's ability to meet customer demands. Ultimately, this could lead to a substantial impact on the company's revenue figures.

Other factors that should be considered…

Despite STLA's gradual progression toward EVs, the company's investment in this sector is substantial. The Jeep Wrangler 4xe and Chrysler Pacifica hybrids remain among California's top-selling EVs. However, business performance is volatile.

STLA announced a recall of over 32,000 vehicles last month due to potential fire hazards. Declining sales of Jeep ICE variants and soaring interest rates have compelled the company to adopt aggressive cost-reduction measures. This change may result in major disruptions for numerous employees' livelihoods.

It is not the first time the company attributed layoffs to the EV transition. About 1,350 employees at STLA's Illinois plant were laid off, citing the same rationale. This development comes at a compelling time as Detroit's "Big Three" – General Motors, Ford Motor Company, and STLA – are simultaneously exploring cost-cutting strategies.

This follows the recent agreement to significant wage enhancement in response to United Auto Workers' strikes this year. Consequently, many positions within the automotive industry face uncertainty, leading to widespread usage of the term "restructuring" in the current discourse.

STLA is indeed the proprietor of several well-known brands. However, the perceived quality of these brands falls short when matched against some competitors. Management will need to remain steadfast in addressing and circumventing this issue.

The auto giant has set its sights on putting 47 EVs on the road by the end of next year. Of course, such a target is easier said than done. To successfully execute this plan, STLA must continue to innovate with new model introductions and astutely invest without placing undue risk on profit margins or destabilizing the company's financial footing. The successful implementation of this intricate transition represents the primary risk and question concerning STLA stock.

The difficulty of this task becomes more pronounced when compared to peers such as Tesla, which has already established streamlined profitability through its vehicle production.

Determining wise investment strategies that properly steer STLA forward while confronting a market saturated with inexpensive Chinese vehicles is challenging. Moreover, predicting the outcome of this endeavor remains incredibly tough.

Valuation

At the current share price, STLA’s shares look tantalizingly cheap. Its forward P/E and Price/FCF multiples are 3.44 and 2.51, respectively, lower than the industry averages. Also, the company pays an attractive dividend yield of 6.53%.

Bottom Line

STLA is at a crucial juncture. The auto industry is immersed in an epochal shift toward electrification. Despite STLA's robust cash flows, it lags behind premier EV manufacturers in key areas of technology, sales, and future competitiveness. As a newcomer within the EV space, STLA recognizes the need to accelerate its progress, with monumental investments lined up over the forthcoming decade.

Investing in STLA is not without risks. The viability of the investment hinges on the company's ability to generate a meaningful amount of cash flow this decade. If it fails to do so, this could significantly hinder the funding earmarked for its transition to EVs.

The increasing global demand for EVs could place STLA in a precarious position and negatively affect its cash flow from operations. With an influx of automakers vying for market share, the fierce competition in the EV market could pose significant challenges to STLA. However, the potential rewards could be substantial if the company implements its strategies effectively.

STLA must successfully navigate numerous hurdles, including imminent economic turbulence, pricing pressure, rapidly evolving consumer preferences, attacks from emerging competitors, and, importantly, the strategic handling of disputes related to emission policies.

It is somewhat eyebrow-raising that layoffs transpire so swiftly following the confirmation of the latest "record" UAW agreement, a pact envisioned to establish the most robust job security in the face of transitioning to Battery Electric Vehicles (BEVs) and hybrids. Contrary to expectations, job numbers appear to be contracting rather than expanding, marking yet another occasion where grim reality dawns after the initial euphoria dissipates.

Considering the waning demand for their " premium SUVs, " one might question if STLA ever alluded to the fact that they'd be reducing shifts and trimming employee numbers at their twin Jeep plants, considering the waning demand for their "premium SUVs." This comes despite the Fifth-Generation Grand Cherokee only halfway through its minimum six-year cycle.

Moreover, it is curious that they place the onus on California's stringent CARB regulations – rules that have existed long before. It would be expected that STLA has crafted or is at least devising strategies to roll out more BEVs and hybrids to enhance compliance with CARB regulations.

Interestingly, recent layoff news and issues with the CARB have kept investor confidence strong. Indeed, STLA stock experienced a decrease of less than half a percent on Thursday last week, a minor setback that has since been regained. However, given the current circumstances, potential investors might consider waiting for a better entry point in the stock.

Behind the Numbers: Analyzing the $11.3M Airbnb (ABNB) Stock Sale

Posted on by The INO.com Team

Airbnb, Inc. (ABNB) CEO and Chairman Brian Chesky sold 84,144 shares on December 5. The shares were sold at prices ranging from $132.89 to $135.68, for a total value of nearly $11.31 million. Following the sale, the CEO now owns 15.9 million shares of ABNB. The transaction was disclosed in a legal filing with the SEC.

Also, Brian Chesky made other trades recently. On November 6, he sold 30,000 shares of ABNB stock at an average price of $118.59, for a total value of approximately $3.36 million. On October 2, the CEO sold another 30,000 shares of Airbnb stock at an average price of $136.54, for a total value of nearly $4.1 million.

On September 12, Chesky sold 150,000 shares of ABNB stock at an average price of $150.06 for a total value of approximately $22.51 million.

Over the past year, of the 190 insider trades, 162 were ‘sell.’ of which 156 were sales.

The CEO’s recent stock sale has raised some eyebrows in the investment community. Insider selling is often seen as a negative sign, as it could indicate that those with the most insight into the company’s workings and growth prospects believe that its stock price is overvalued or may underperform in the future.

But at the same time, insiders may sell shares for reasons unrelated to their expectations for the company’s future performance. For instance, when insiders liquidate their shares at consistent points throughout the year, they are merely diversifying their holdings. Also, the remaining sizable position owned by the CEO demonstrates his confidence in the company’s prospects.

Shares of ABNB have gained more than 20% over the past month and nearly 14% over the last six months. Also, the stock has surged more than 49% over the past year.

However, let’s take a close look at the travel company’s fundamentals to gauge how its stock will perform in the near term:

Robust Performance in the Last Reported Quarter

For the third quarter that ended September 30, 2023, ABNB, an online marketplace for hospitality services, reported revenue of $3.40 billion, beating analysts’ estimate of $3.37 billion. This compared to the revenue of $2.88 billion in the same quarter of 2022. The total nights and experiences bookings were 113.2 million, more than the 99.7 million reported in the year-ago quarter.

The travel company’s income from operations came in at $1.50 billion, an increase of 24.4% from the prior year’s quarter. Its net income rose 260.3% year-over-year to $4.37 billion. It posted net income per share attributable to Class A and Class B common stockholders of $6.63, compared to the consensus estimate of $2.10, and up 270.4% year-over-year.

Furthermore, ABNB’s cash and cash equivalents stood at $8.18 billion as of September 30, 2023, compared to $14.86 billion as of December 31, 2022. The company’s current assets were $17.52 billion versus $14.86 billion as of December 31, 2022.

Mixed Analyst Estimates

Analysts expect ABNB’s revenue for the fourth quarter (ending December 2023) to grow 13.4% year-over-year to $2.16 billion. The consensus EPS estimate of $0.66 for the ongoing year indicates a 36.5% year-over-year increase. Moreover, the company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.

For the fiscal year 2023, Street expects Airbnb’s revenue and EPS to grow 17.3% and 198.7% year-over-year to $9.85 billion and $8.33, respectively. In addition, the company’s revenue for the fiscal year 2024 is expected to increase 11.4% from the previous year to $10.98 billion.

However, analysts expect the company’s EPS for the next year to decline 47.7% year-over-year to $4.36.

Bleak Fourth-Quarter Forecast

The home-sharing company expects fiscal 2023 fourth-quarter revenue to be between $2.13 billion and $2.17 billion, representing year-over-year growth ranging from 12% to 14%.

In a letter to shareholders, Airbnb said it is seeing enhanced volatility in the quarter after a record-breaking summer travel season during the third quarter.

“We are seeing greater volatility early in Q4, and are closely monitoring macroeconomic trends and geopolitical conflicts that may impact travel demand,” the company said. On a conference call with analysts, executives said that assessment wasn’t prompted by softness in a specific region, but rather by “broad-based” unpredictability across the board.

“It’s just a little too early to tell how much volatility we see” going into the fourth quarter, CFO Dave Stephenson told analysts.

Regulatory Challenges and Other Headwinds

On September 5, New York City implemented new short-term rental regulations, resulting in a “de facto ban” on Airbnb’s platform. This led to a sharp reduction in listings in the city, one of ABNB’s chief markets. Regulatory restrictions on room rentals are reportedly in place or may occur soon in global locales such as Florence, Paris, and Austria.

In addition, the Canadian government recently introduced new tax measures targeting short-term rentals, which will significantly target Airbnb.

Many analysts further predict an imminent U.S. housing market crash. Famous financial author Robert Kiyosaki, who wrote Rich Dad Poor Dad, reportedly declared on social media, “Airbnb to lead real estate market crash.”

Wall Street Analysts Cut Their Price Targets

Airbnb’s stock was downgraded by analysts at Jefferies Financial Group from a “Buy” rating to a “Hold” rating on November 29, citing concerns over the slowdown in booking, which increases the risk of not meeting consensus expectations. Analysts cut the stock’s price target to $140 from $155.

Also, analysts at JPMorgan Chase lowered their price target on ABNB from $130 to $118 and set a “Neutral” rating on the stock in a research note on Thursday, November 2. Needham & Company LLC slashed their price target on Airbnb shares from $160 to $150.

Elevated Valuation

In terms of forward non-GAAP P/E, ABNB is currently trading at 16.72x, 7.7% higher than the industry average of 15.52x. The stock’s forward EV/Sales of 8.27x is 590.2% higher than the industry average of 1.20x. Likewise, its forward EV/EBITDA of 23.02x is 135.4% higher than the industry average of 9.78x.

In addition, the stock’s forward Price/Sales and Price/Book multiples of 9.15 and 9.58 are significantly higher than the respective industry averages of 0.89 and 2.50. Also, its forward Price/Cash Flow of 21.60x is 127.6% higher than the industry average of 9.49x.

Solid Profitability

ABNB’s trailing-12-month gross profit margin of 82.67% is 133.1% higher than the 35.47% industry average. Moreover, the stock’s trailing-12-month EBITDA margin and net income margin of 23.59% and 56.87% are considerably higher than the industry averages of 10.91% and 4.48%, respectively.

Furthermore, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 74.47%, 14.56% and 25.47% favorably compared to the respective industry averages of 11.40%, 6.04%, and 3.99%. Also, its trailing-12-month levered FCF margin of 29.96% is 483.2% higher than the industry average of 5.14%.

Bottom Line

ABNB reported stronger-than-expected revenue and earnings in the third quarter of fiscal 2023. The last reported quarter was a record-breaking summer travel season for its business, with financial performance helped by continued solid international growth.

However, the home-sharing company provided a weak forecast for the fiscal 2023 fourth quarter as it sees greater volatility, with macroeconomic headwinds and geopolitical conflicts impacting travel demand. Further, Airbnb continues to face regulatory challenges, and a famous author declared that the company would lead the housing crash.

Insiders are continuously selling shares with the most recent sale by Airbnb CEO worth $11.3 million, indicating declining confidence in the company’s performance in the future.

Amid increased insider selling, stretched valuation, and uncertain near-term prospects, investors could hold ABNB and wait for a better entry point in this travel stock.